What is fiat money and how does it differ from goods money?
Fiat money is an object that has no intrinsic value and is still used as a medium of exchange. The term “fiat” derives from the Latin “fieri” meaning ‘it shall be’. Fiat money differs from commodity money which can be exemplified by the examples of gold, silver or salt.
In contrast to fiat money, commodity money has an intrinsic value, which is due to its utility and cannot be regulated by governments. Current currency systems rely on fiat money, which is usually not officially backed by commodity money.
However, the fiat money of a country also depends on the balance sheet of the state, which consists of state assets and future tax revenues. A possible transport surplus has an important influence on the stability of the currency because the demands mean that the state will continue to have financial resources in the future.
What features does a currency need?
In general, money can only have a value if it provides users with a utility. This justifies the benefits of the three monetary functions. A currency must, therefore, have a means of exchange, savings, and calculation.
After all, the means of exchange function of the currency depends on the acceptance of the market as payment. The savings function, on the other hand, is only given if there is confidence in the currency and the market believes that it will continue to be used as a medium of exchange in the future.
The calculation function is strongly dependent on the first two factors, but ultimately means that users should get an overview of the fair value of goods.